Česká národní banka


Czech rates may not rise if crown keeps gaining, central banker says

By Jan Lopatka (Reuters 20. 6. 2017)

  • Crown so far, domestic factors favour hike in Q3
  • But continued faster appreciation could delay move
  • Central bank also watching ECB
  • Not planning to use interest rates to slow mortgages

The Czech central bank may put off raising interest rates to beyond the third quarter if the crown keeps strengthening at the pace seen in recent weeks, bank board member Marek Mora said.

The economy is healthy and the bank has room to tighten policy in the third quarter, in line with its forecasts, although slow inflation in the euro zone remains an issue, Mora said.

But further substantial gains by the crown could compensate for that and push rate increases into the future, Mora, who joined the board in February, told Reuters in an interview on Monday.

In April, the bank dropped its cap on the value of the crown, a tool for keeping monetary conditions relaxed, after more than three years. That opened the door to a rise in interest rates, which would be the first in central Europe in the current economic cycle.

"When I take into account overall the crown's firming since the exchange rate cap, a rate increase could come in the third quarter," Mora said.

"But when I look at the pace that has been happening in the past weeks and extrapolate it into the future, I would see it later."

The bank forecasts a rise in the third quarter. Inflation has accelerated to 2.4 percent in May, above a 2.0 percent target.

The main repo rate has stood at 0.05 percent since November 2012. Markets are pricing in an increase in the first half next year.

The crown at first rose slowly from its former cap - 27 to the euro - partly because of long crown positions. It had settled around 26.50 in May but then jumped to 26.115 last week, 3.4 percent stronger than the cap.

A stronger currency in effect tightens policy by making imports cheaper and exports more expensive.

Mora, an economist who was previously director at the EU Council focused on budget and taxes, said domestic economic factors have been broadly in line with the central bank's May quarterly forecast.

He said the bank also must keep an eye on the European Central Bank's asset-buying programme continuing until the end of this year though it is not clear what will follow.

"A potential delay in the departure from quantitative easing ... would also affect our interest rate increases," he said.

"If we raise rates, we may do it even under a situation when the ECB still is in an unconventional regime. We would do it very slowly and sensitively, in order to avoid capital inflows and the crown firming even more," he said.

Rates not for financial stability

The bank last week ordered banks to raise their counter-cyclical capital buffers because of fast credit growth.

It has also sought powers to regulate households' mortgage exposure. But the law is stuck in parliament and may not be on the agenda before an October election.

This has led to debate over whether the bank may eventually resort to using the counter-cyclical buffer or even interest rates to cool the housing market.

Mora said the bank would seek to use targeted measures to regulate mortgages. He said using the counter-cyclical buffer could not be excluded if the bank lacks other tools, but interest rates would remain a means of coping with inflation.

"I do not believe that we would leave inflation targetting and start using interest rates for financial stability. That will certainly not happen."